RESERVE BANK OF AUSTRALIA
TRANSCRIPT OF QUESTION & ANSWER SESSION
Guy Debelle
Assistant Governor (Financial Markets)
Remarks to the Mortgage Finance Industry Association,
Industry Leaders Panel Forum
Melbourne - 22 July 2009
TRANSCRIPT OF QUESTION & ANSWER SESSION
MR SWITZER: Let’s start with the most exciting guy in the room because, you
know, at the core of our whole financial system is the Reserve Bank. We hang on
every word that they utter, particularly now; and Guy, you’ve got a fantastic name –
Guy Debelle – Guy “a beauty”. And we all said “you little beauty” yesterday when
the Reserve Bank Minutes came out. Is the economy looking a lot better now than it
was, say, 12 months ago?
DR DEBELLE: Well, as you said, we put out the Minutes of the last Board meeting
yesterday. I’m not going to say much more than what was in that but - - MR SWITZER: No, of course. You repeat and we’ll celebrate it
DR DEBELLE: Yeah, I’ll regurgitate it for you. The economy is looking better than
we thought it might a few months ago; that’s certainly true. Certainly, the world is
looking a better place than it was looking last October when it wasn’t looking a great
place. And, here, the China story has really helped, combined with the fact that –
we’re the only – basically, the only major country which actually recorded export
growth around the world, and that’s a China story. But the other thing is that the
stimulus – we’ve had a lot of stimulus put in on both the monetary and the fiscal side.
As Vernon mentioned earlier, home loan rates are as low as they’ve been for 30, 40
years and that’s actually working here.
So monetary policy and fiscal policy are working here – and that’s not necessarily
been the case in other countries. So – as was said yesterday, the situation is looking
somewhat better than it was looking. The risks are more evenly balanced than they
were. The risks are still out there, but they’re certainly more evenly balanced than
they were looking a few months back.
MR SWITZER: When you were sitting at home not being a Reserve banker and you
saw a lot of the bad news about China and about views on the Aussie economy, did
you sometimes get really cranky but, no, you had to sort of contain your crankiness
because things were – we were a good chance of ending up where we are now?
DR DEBELLE: No. What happened in the last part of last year was pretty much
unprecedented in terms of the whole world slowing dramatically all at once. We’ve
never really seen that before. We had always thought we’d do better than the rest of
the world but, when the rest of the world is sort of contracting – the US economy is
contracting 5 or 6 per cent and unemployment is rising to 10 per cent – doing better
than that is not necessarily setting an incredibly high bar. But, nevertheless, we
thought we would do better. And there was that synchronised collapse. I think
everyone looked at the events which happened in the US in September. Businesses
pulled their heads in; households pulled their heads in; financial markets completely
pulled their heads in; and things weren’t looking great there for a while. And that
was true probably through to the end of the year. But I think what’s shown through is
that parts of the world have been able to get out of this okay because they didn’t go
into the situation with as many problems as countries like the US. And so countries
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like China have been able to impart a lot of stimulus to their economy. We’ve been
able to do the same. It’s been effective and we’re sort of seeing some of the benefits
of that now.
MR SWITZER: I guess everyone in this room, they know you have to be political
and careful about what you say, but one area of your expertise where everyone would
love to hear what you think might happen is in the area of credit markets and
securitisation. So we’d love you to say, “Oh, securitisation will get better next
month,” but what is the true story?
DR DEBELLE: Well, securitisation actually I think is getting better. I mean, I think
I can say it’s going to get better next month because it’s actually getting better month
by month. Now, one thing I think which everyone in this room probably should be
aware of, and probably are aware of, is the market is not going to be back to where it
was in June 2007. That’s not going to happen. One thing – and it relates to
something Vernon was talking about earlier about the offshore buying of mortgagebacked securities in this country – a lot of them were bought by SIVs. Now, if I
would have said “SIV” two years ago, none of you would have known what the hell I
was talking about, but they’re now reasonably well known. So a lot of those
structured investment vehicles, they just don’t exist any more. And they were a
decent buyer of Australian RMBS offshore. And they’re not around any more to buy
them going forward, so some chunk of the demand for the Australian RMBS from
that part of the market just ain’t there any more. I think, however, from what we can
– because there hasn’t been many new RMBS written over the last two years – in
fact, there really hasn’t been any outside what the AOFMs bought – but everyone
keeps on paying off their mortgages, the actual stock of outstanding RMBS – of
Australian RMBS is down about 40 per cent from where it was two years ago which
means, if you think about investors out there looking to buy this stuff, they have 40
per cent less of it than they did two years ago so, at some point, they’re going to start
to want to buy some more.
And I think every day we’re getting closer to that point, but it’s not going to be as big
a market probably, at least in the short term, as it was a couple of years ago. You
know, our general sense is that sort of secondary market – that overhang of the sort of
stock which have been out there is getting close to be being run off. The SIVs have
basically closed down and sold all their stuff back into the market. That process is
basically finished. So I think once that process is finished then we’re closer to the
point where people are going to be looking for new mortgage-backed securities to
buy.
MR SWITZER: Okay. Are we actually short of funds at the moment for the
housing market?
DR DEBELLE: No at the moment - we’ve got reasonable growth in credit for
housing. It’s not the 20 per cent we had a few years back but it’s travelling at about 8
3.
per cent at the moment, which is a decent pace. So there’s not a shortage of housing
credit out there at the moment.
MR SWITZER: It’s just concentrated in the big four banks because they’re in the
much stronger position to buy and also get the profits.
DR DEBELLE: Yeah. So the share of the mortgages - as everyone in this room I’m
sure is well and truly aware – the share of mortgages being written by the four largest
banks has gone up considerably; that’s certainly the case.
MR SWITZER: Guy, do you have any views on how we could see funding increase
in an alternative way rather than waiting for securitisation to improve?
DR DEBELLE: I mean, one – as I said, I think the main realisation a lot of people
have - and a lot of participants in the industry, not necessarily on the broking side but
more on the aggregation side – is the point I made at the beginning, which is the
industry is not going to be the same as it was – and as the point Phil made. The
industry is not going to be the same as it was a couple of years ago. So if you want to
go back – if you think you can go back to the funding model you had two years ago,
you’re probably kidding yourself. I mean, that’s true for a major bank, just as it is for
the smallest non-bank. You know, the world has changed. Funding is not going to
be as readily available. It’s not going to be as cheap as it was a couple of years ago.
So every participant in the industry has got to be aware of the fact that the situation
has changed. So you have to look at putting in place a sustainable funding model,
and that’s going to vary depending on who you are. So, as I said, I think the main
realisation everyone has got to come to is the point that it’s not going to be the same.
But, there is out – we have seen again in the last few months that the credit unions
and building societies, for instance, have picked up a bit of market share so, those
guys, which are primarily deposit-funded – there were some – some part of that
sector did rely on securitisation, not all of it, and they are able to sort of provide an
alternative source. The non-banking sector, as I said – it’s basically, at this stage, is a
question of when that securitisation market comes back for them to be a viable source
of competition. But the other point I suppose is that one thing that the experience
over the last – well, Vernon would probably say 30 years, but at least since the early
to mid-90s is that, as we went on from there, we saw a lot of players come into this
market so, ultimately, the ability of people to come in and provide that competition
was there. Some of those people who came in towards the end, their ability to
compete has probably been fundamentally undermined but, if margins were to start to
increase, there is the scope for people to come in and provide that competition, just as
they did through the ‘90s.
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MR SWITZER: So for people in this room who want to look to the economic or
money market indicators that might say that the potential for securitisation to get
better – what are those indicators? Are they a much greater improvement of the US
economy with Treasury yields low so people feel secure and then they’ll take their
money out of government bonds and want to put them into securities products?
DR DEBELLE: Yeah. I think one other point – one point which is worth
highlighting: there’s never been an issue with the credit quality of mortgage-backed
securities in this country. In fact, no one has actually lost any money on a mortgagebacked security in this country, unlike the US. But, unfortunately, the word
“mortgage-backed security” has been tarred with the reputation of what happened in
the US, even though the quality of Australian mortgage-backed securities is
considerably higher. And so I think you have to get past the point where investors or
– if you’re a fund manager out there and you go and tell your pensioner who’s got
their funds with you, “Oh, by the way, I’ve just invested a chunk of your funds in
mortgage-backed securities” – whereas a few years ago they were very happy about
that because they got a nice fat return out of it – now, they say, “Oh, mortgagebacked securities equals bad.” So the investor mentality has got to change back again
to recognising the quality of the Australian mortgage-backed security which has
continued to perform right throughout this whole episode. So it does – and it partly
relates to what you said, Peter, that people have to be – they’re getting low yields on
their supposedly very safe investments and they need to be looking to move beyond
that again, and that’s going to take time. I mean, investor confidence was shot in
October and we’re six, eight, nine months on from that now and it’s certainly
improved, and one hopes it continues to improve, but it is going to take a little more
improvement to get people comfortable with investing in it. But, as I said earlier on,
every day we’re one day closer to that.
MR SWITZER: From the bank’s point of view, on your radar screen is a 40 per cent
fall in real estate prices showing up in any of the economic indicators you guys look
at?
DR DEBELLE: Well, I mean, I can only say what we’ve seen about what’s
happened so far but house prices this year have been rising so – and for a while there
we saw the top end of the market come off, but now the whole market is basically
rising. And one point on the first home owner’s scheme is that the first home owner
share has been high over the last few months, and I’m sure all the people in this room
have seen a disproportionate number of them walking in the door, but the other thing
to remember is a lot of the first home buyers weren’t in the market for the previous
five, six years almost throughout – for the bulk of this decade actually, because house
prices were higher relative to incomes, because interest rates were higher. So, to
some extent, those people were shut out of the market, relatively speaking, for a
while, and they’ve come back into the market now, obviously encouraged by the first
home owner’s grant but also by where interest rates are and the fact that house prices
had not done a lot for a few years made it – housing affordability had certainly
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improved. So some of those people have probably brought forward their purchase,
but some of them are also catching up on a purchase they haven’t been able to do for
a while.
MR SWITZER: So clearly there were years were first home buyers were very low
so, on average, it’s probably not all that different.
DR DEBELLE: Yeah.
MR SWITZER: So questions – one here.
MR ANTOS: Paul Antos, Mayfair Finance Group – I’m also an advisor as well as a
broker. My question is really towards Guy in relation to the Reserve Bank’s view on
the establishment, or whether or not it is feasible, of a people’s bank, as has been
labelled in the media lately. We – I think, from a broker’s perspective, we want to
see more competition from the banks and from the non-bank sector, so I’d like to see
what his thoughts are about that.
DR DEBELLE: Yeah. I thought one interesting response was the credit unions and
building societies coming up and saying, “Hang on; what about us?” You know, so
there is this sector out their called the credit unions and the building societies which
do business with you guys which are somewhat community-oriented and sort of have
that local presence. Beyond that one I’m not sure I’m going to stray too far down that
track.
MR SWITZER: I guess the RBA line would be: if it’s there, you’re happy to
regulate them.
DR DEBELLE: Well, I mean, APRA regulates the banks; we don’t.
MR SWITZER: Yeah. Well, okay - - DR DEBELLE: So - - MR SWITZER: - - - indirectly affect their life - - DR DEBELLE: Yeah. Yeah. So there are a bunch of financial institutions out
there, you know, called credit unions and building societies, as well as the banks like
Glen’s outfit (Dr Debelle refers here to Glenn Baker, Chief Investment Officer of
ING Direct, who was also a panel discussant) and the regional banks, obviously. So
there are not just four providers of housing finance in this country.